Jensen: Buy These Drillers on the Dip

It was a bad day for energy stocks Wednesday as oil fell some $4 a barrel and equities in the sector sold off in sympathy. The oil-services sector is now back to where it was a month ago after a large run up in the first two weeks of September. I believe this provides a good entry point for long-term investors as long as oil prices do not collapse, which I view as unlikely. In addition, natural gas prices are up some 50% from their bottom earlier in the year. Finally, the sector has recently received more positive comments from analysts. Goldman Sachs came out the other day with an upgrade on National Oilwell Varco ( NOV), saying it will be one of the beneficiaries of the strong current newbuild demand. Credit Suisse also chimed in this week, stating that midwater rigs are in a sweet spot right now with tight supply meeting increasing demand, which should be positive for day rates throughout 2014. These two companies sport solid valuations and they should reap the benefits of the improving offshore picture. Diamond Offshore Drilling ( DO) operates a fleet of approximately 49 offshore rigs comprising 32 semisubmersible rigs, 13 jack-up rigs and four drill ships.Three reasons DO has significant upside from $65 a share:

Diamond Offshore has an A-rated balance sheet, the stock sells at just 7x operating cash flow and insiders were net buyers of the shares in the second quarter.

The company has crushed earnings estimates each of the last four quarters. The average beat over consensus has averaged more than 25%.

Analysts expect 10% revenue growth in 2013 with recent new contracts. Credit Suisse also has an Outperform rating and an $82 price target on the stock. The analyst firm also believes Diamond Offshore can make $9 per share in earnings in 2014.

Earnings are popping at this oil-services firm. The company made $3.07 per share in 2011 but is on track to make more than $5.25 per share in 2012. Analysts have more than $7 per share pencil in for 2013.

Helped by its acquisition of Pride International in the second quarter of 2011, revenues are tracking to increase more than 50% this fiscal year. Analysts are projecting a sales increase in FY2013 just under 20% as new rigs are contracted out and day rates improve. The stock's five-year projected price/earnings/growth ratio is under 1 (.65).